Derek Hewett

Derek Hewitt inquired about the potential growth of the Senior Direct Lending Program (SDLP) and Ivy Hill Asset Management (IHAM) over the next year, given their favorable economics, and whether assets on the balance sheet could be sold down to these entities.

Answer

COO Jana Markowicz indicated that historical investment levels of 11% for Ivy Hill and 7% for SDLP serve as good guardrails, affirming their strategic value and high yields. She confirmed that ARCC plans to continue focusing on these investments and that assets were sold to Ivy Hill in Q4, with more balance sheet assets potentially transferable. CEO Kort Schnabel added that there's no stated cap, with growth dependent on market conditions, and the 30% non-qualifying asset cap is the ultimate governor.

Derek Hewitt from Bank of America inquired about the potential growth size for the Senior Direct Lending Program (SDLP) and Ivy Hill Asset Management (IHAM) over the next year, given their favorable economics, and if assets on the balance sheet could be sold down to these entities.

Answer

Jana Markowicz, COO of Ares Capital Corporation, indicated historical highs of 11% for Ivy Hill and 7% for SDLP as potential guardrails, confirming their strategic value and high yields. She noted that assets were sold to Ivy Hill in Q4 and more could be moved. Kort Schnabel, CEO, added that there's no stated cap, but the 30% non-qualifying asset cap serves as a top-end governor, with growth depending on market development and transaction activity.

Derek Hewett asked about the stable PIK income, questioning if it has peaked and how much is structural versus related to borrower stress. He also inquired about potential 'credit blind spots' for investors to watch in the BDC sector.

Answer

CEO Robert Kipp DeVeer explained that most of ARCC's PIK income is structured into deals by choice, particularly in junior capital investments, and is not a sign of portfolio stress. Co-President Kort Schnabel added that 90% of PIK was structured at origination. For blind spots, DeVeer emphasized that a lack of diversification is a key risk, highlighting ARCC's highly diversified portfolio as a major strength.

Derek Hewett asked about the sustainability of the dividend given the forward interest rate curve, the company's view on the current credit cycle for the BDC industry, and the level of loan amendment activity during the second quarter.

Answer

CFO & COO Elizabeth Murray expressed confidence in covering the $0.26 dividend based on the current SOFR curve. Co-Portfolio Manager Bryan High described the current credit backdrop as constructive. President Matthew Freund added that amendment activity was lower than average, reflecting improved credit health as seen in the declining percentage of risk-rated 4 and 5 assets.

Inquired about the dividend's sustainability in a falling rate environment, the company's view on the credit cycle, and the level of amendment activity in the second quarter.

Answer

The company expressed confidence in covering its dividend based on the current SOFR curve. They view the current economic backdrop as constructive for credit but find the long-term outlook uncertain. Amendment activity was lower than average in Q2, consistent with improving credit trends in the portfolio.

Derek Hewett asked about the sustainability of the dividend given the forward interest rate curve, the outlook for the credit cycle across the industry, and the level of loan amendment activity in Q2 compared to Q1.

Answer

CFO & COO Elizabeth Murray expressed confidence in covering the $0.26 regular dividend based on the current SOFR curve. Co-Portfolio Manager Bryan High described the current credit backdrop as constructive but noted forecasting two years out is difficult. President Matthew Freund stated that amendment activity was lower than average in Q2, pointing to the shrinking pool of criticized assets as a positive indicator.

Derek Hewett from Wells Fargo Securities, LLC questioned the 40 basis point quarter-over-quarter decline in portfolio yield and asked if the fair value of loans with tariff exposure was adjusted in Q1.

Answer

Co-CEO Alex Chi explained that loan repricing has largely subsided and noted that new investment spreads widened. Co-CEO David Miller added that the yield decline was also driven by the exit of high-coupon non-accrual loans. Regarding tariffs, Chi clarified the exposure analysis was prospective, based on supply chain risk, and no performance impact has been observed yet, so fair values were not adjusted on that basis. Miller noted more clarity on tariffs emerged after the quarter ended.

Derek Hewett of Bank of America inquired about the new incentive fee structure and whether the full impact of the fee would be reflected in Q1 results, assuming stable credit conditions.

Answer

An executive confirmed the incentive fee is being reduced from 20% to 17.5% while retaining the shareholder-friendly lookback provision. They explained that due to this lookback feature and potential future gains or losses, the actual fee earned will naturally fluctuate over time and is subject to the cap.

Derek Hewett from Bank of America inquired about the increase in risk-rated 3 and 4 assets, seeking details on the negative credit migration and affected sectors, especially given the concurrent drop in non-accruals.

Answer

Co-Chief Executive Officer Alex Chi stated the approximate 1% increase in risk-rated 3 and 4 assets was driven by one underperforming company being downgraded. Co-Chief Executive Officer David Miller identified the company's sector as business services, with Alex Chi clarifying it was not in the ARR or healthcare sectors.

Derek Hewett asked about the timing for when the full incentive fee would normalize and kick back in, assuming credit quality stabilizes, considering the three-year look-back feature.

Answer

CFO Amit Joshi stated that BCSF expects the incentive fee to stabilize from the second quarter of 2025 onwards. He noted that while the significant impact from the COVID period has been accounted for, the payment component of the look-back feature could still introduce some future volatility.

Derek Hewett asked about Bain Capital Specialty Finance's strategy for addressing the $300 million of bonds that are set to mature in early 2026.

Answer

CFO Amit Joshi stated that the company is in continuous dialogue with its banking partners and intends to access the capital markets in 2025 to refinance the debt. He mentioned that they would prudently manage the liability using a combination of their revolving credit facility and potentially new unsecured notes.

Derek Hewett asked for clarification on the forecast for achieving target leverage, questioning if it accounts for the rotation out of the broadly syndicated loan portfolio. He also inquired about the company's assessment of risks related to potential tariffs and political actions from Washington D.C.

Answer

Co-CEO Douglas Goodwillie clarified that the leverage target forecast is based on the current strong investment pace and does not include the BSL portfolio rotation. Regarding risk, Mr. Goodwillie and Senior Vice President Frank Karl addressed the questions. Mr. Goodwillie noted minimal direct exposure to government funding risk but acknowledged monitoring secondary effects, such as in healthcare. Mr. Karl explained that while about a quarter of the portfolio has some import exposure from China, most borrowers have pricing flexibility to mitigate tariff impacts.

Derek Hewett asked about KBDC's plans to explore the unsecured notes market in 2025, seeking details on progress toward obtaining a rating from a major agency and the potential timeline for an institutionally sized deal.

Answer

CFO and Treasurer Terry Hart stated that while they have a KBRA rating and can approach a larger agency, the immediate strategy would likely be another private placement. He explained the plan is to 'leg into' the institutional market by first increasing their outstanding notes closer to the $300 million threshold needed for a larger public deal, which they would then pursue upon maturity of the smaller placements.

Derek Hewett of Bank of America requested the specific dollar amount of the incremental dividend from the second joint venture (JV 2) that was paid in anticipation of its wind-down.

Answer

CEO Justin Plouffe specified that the incremental dividend from the joint venture was approximately $1.2 million. He added that this had a net impact on Net Investment Income (NII) of about $0.02 per share for the quarter.

Derek Hewett of Bank of America asked for the size of the upper middle market portfolio that is slated to be rotated into the core middle market strategy and the unlevered yield differential between the two strategies to gauge the potential for top-line growth.

Answer

Executive Shaul Vichness stated that the upper middle market portfolio is approximately $200 million, or about 10% of the total portfolio. He explained that the yield premium for traditional middle market loans versus BSL/upper middle market is at the wider end of its historical 100-200 basis point range. He noted current spreads are around 500 basis points for core middle market deals, compared to the low 300s for BSL and upper middle market assets.

Derek Hewett of Bank of America questioned how much of the recent SOFR decline was reflected in Q3 earnings and how quickly the portfolio reprices lower. He also asked about the significant drop in short-term investments and if that runoff would continue.

Answer

CEO Christopher Long stated that the impact of the September rate cut on Q3 results was 'de minimis' due to the timing. He noted that much of the repricing activity is already baked into current market spreads, which have stabilized. President Matt Bloomfield addressed the second question, explaining that the short-term investments balance has reached a 'more normalized range' after being used to fund commitments, including approximately $15 million in private credit deals set to close in Q4.

Derek Hewett of Bank of America asked about the impact of the recent Fed rate cut on Q3 earnings, the portfolio's repricing speed in a falling rate environment, and the outlook for the firm's declining short-term investments.

Answer

Christopher Long, Chairman and CEO, explained that the Q3 impact of the September rate cut was 'de minimis' due to timing and that much of the market's repricing activity has already occurred. Matthew Bloomfield, President, added that the decline in short-term investments was due to funding commitments and the balance has now reached a more 'normalized range.'

Derek Hewett from Bank of America asked why only 71% of the portfolio has financial covenants given the lower/core middle market focus, and inquired if the existing PIK income was structured at origination or resulted from amendments.

Answer

President Henry Chung explained the 71% covenant figure is a function of market segmentation, as deals at the upper end of their 'core middle market' definition may be covenant-lite. CEO Jason Breaux added that these deals still have strong documentation and protections. Henry Chung also clarified that the majority of PIK income was from terms available at origination, primarily in second lien or unsecured investments, rather than from amendments.